Underwater Report

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1The New Bottom Line, 2011 The Win/Win Solution

America is more than three years into an economic crisis that shows no signs of abating. One in 10 Americans can-

not find a job, one in five owes more on their mortgage than the home is actually worth, foreclosures continue to seta record pace, and family-owned small businesses are once again shuttering their doors as prospects re-emerge of eventougher times ahead. More and more Americans are losing faith in what has long made this country great the beliefthat they can create a better life through hard work.

But the banks can do something right now to change all that. By writing down all underwater mortgages to marketvalue, the nations banks could:

Pump $71 billion into the economy every year;o In New York state the annual stimulus would equal $1.25 billiono In Ohio, $1.64 billiono In Florida, a staggering $12 billion

Create more than one million jobs annually;o In Massachusetts this would create over 35,000 jobso In Illinois nearly 43,000 jobso In California, over 300,000 jobs

Save families an average $543 per month on their mortgage payments; Help investors come out ahead compared with the negative financial impact of foreclosures Fix the foreclosure crisis once and for all.

e overhang of underwater mortgage debt is one of the primary drags on economic recovery. It continues to devourtens of billions of dollars annually, money that would otherwise go into our economy in the form of consumer spend-ing. is increase in consumer demand would in turn help spur job creation and increase revenue for governmentsthat have seen their tax income plummet as a result of the downturn.

To date, foreclosure prevention efforts have focused on making the banks whole for a period of time while doing littleto fundamentally restructure and reduce the debt load carried by homeowners. e underlying assumption in thismodel that if we wait it out, then things will get better is not only flawed, but is actually worsening the pain formillions of families and continuing to undermine long-term prospects for a housing recovery. We need aggressive ac-tion now that creates a New Bottom Line for American homeowners.

e banks have it in their power to restore the American Dream of homeownership that helps build wealth for fami-lies. Whats more is that we have already paid them the money to do it. American taxpayers came to the banks rescuewith trillions in bailouts and backstops and now it is time for the banks to begin to undo the damage they caused andgive back a working economy.

But remember, it was the housing market that triggered this crisis. We

spending. But the reality is that the housing market is what triggered

Senator John McCain1


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Why Should the Banks Pay?Underwater homeowners owe $709 billion more on their mortgages than their homes are worth. If banks wrote downthe principals and interest rates on underwater mortgages to market value, it would save homeowners $71 billion peryear.

Banks received $14 trillion in taxpayer-funder bailouts and backstops so that they would start lending to the American

people again to jumpstart the economy. at never happened.2 While some of this money has been paid back, muchof this $14 trillion has not and will never be returned. ey should just subtract this $709 billion offthe trillions theystill owe us.

$709 billion is a fraction of the trillions they took, and it would go a long way towards reviving the economy. Further-more, the bailout money was also intended to cushion the banks from losses on their toxic assetsa technical term forbad loans. We gave them money so that they could write down bad loans without going under. It only makes sensethat they now write down underwater loans.

Banks can afford this. US banks are currently sitting on a historically high level of cash reserves of $1.64 trillion.3

Under this proposal they would only be forgoing $71 billion in payments annually, most of which would have beeninterest charges rather than principal payments. In 2010, the nations top six banks alone paid out more than twice

that figure in bonuses and compensation ($146 billion).4 As part of the process, regulators may choose to change ac-counting rules to allow banks to realize the losses from these mortgage write-downs over a period of several years sothey do not have to record the losses on their books all at once. In the past, regulators have been more than willing tomodify accounting rules to help the banks, so it is only fitting that they do so now in order to jumpstart the economyby preventing foreclosures and creating jobs.

e banks created the housing crisis with their reckless and predatory lending practices. ey should be held account-able for the damage they have done to our economy and be forced to do their part to clean up the mess they havecreated. Working families across the country have seen their home values plummet, have had their life savings wipedclean, have been powerless to help when their loved ones lost their jobs, and in too many cases watched helplessly whilethey lost their homes to banks that continue to post billion-dollar profits and pay out billion-dollar bonuses. Add tothat the trillions in bailouts and backstops that taxpayers gave to the banks, and one thing is clear: We have already

paid. Now it is the banks turn.

A Vicious CycleAll of the purported efforts thus far to resolve the jobs crisis have fallen flat. Even the 2009 stimulus bill, which suc-ceeded in creating jobs, was not big enough to overcome the massive scale of the problem. e official unemploymentrate still lingers near 10% and shows no signs of abating. All of the efforts to date have ignored a major underlyingcause of the jobs crisis: the housing crisis. In July 2011, Nobel Prize winning economist Paul Krugman noted, ebig drag on the economy now is the overhang of household debt, largely created by the $5.6 trillion in mortgage debtthat households took on during the bubble years.5

As of March 31, 2011, 23% of American homeowners were underwater on their mortgages. ey owed banks $709billion more on their mortgages than their homes were worth. 6 While homeownership was once lauded as the mosteffective way to build wealth, for these working families it has become an endless drain on household income. eyhave to pay down $709 billion in principal before they can even start building equity in their homes.

Meanwhile homeowners have seen banks cut their credit card limits in half and hike up their interest rates, or canceltheir credit cards altogether. So as they try to pay their inflated boom-era mortgages with their modest recession-erasalaries, they have also lost the ability to access money to make ends meet. is means a larger and larger share of


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Creating a Working Economye American economy is chained to an out of proportion and crushing housing debt load. Chronic unemployment,foreclosures, and small business closings can all ultimately be traced back to the housing crisis. e banks hold thekey to unlocking massive economic stimulus. By writing down underwater mortgages to market value, they would

put more than $6,500 into the pockets of the average underwater homeowner each year. With an extra $6,500 fami-lies could afford expenses, big and small, that they have been putting off. is would have a ripple effect throughoutthe economy, and it would create more than one million jobs nationally. It would serve as the second stimulus thatAmerica so desperately needs, only without added costs to taxpayers.


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The New Bottom Line, 2011 The Win/Win Solution

Underwater homeowners in each state


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The New Bottom Line, 2011 The Win/Win Solution

Appendix B: MethodologyTo calculate the potential savings from writing down principals on all underwater mortgages to market value andrefinancing them into 30-year fixed-rate mortgages at current interest rates, we first calculated how much underwaterhomeowners are currently paying on their mortgages. To arrive at this number, we needed to determine the totalprincipal on underwater mortgages and the average interest rate that underwater homeowners are paying. Accordingto data from CoreLogics publicly available Negative Equity Report for the first quarter of 2011, as of March 31, 2011,and the total outstanding principal on underwater mortgages in the United States was $2.0 trillion.

Determining the average interest rate on these mortgages proved difficult due to inadequate information, so insteadwe used the interest rate from 2006, which is a conservative figure. According to the Federal Reserve Boards H.15Release, in 2006, the going interest rate on a 30-year, fixed-rate, conventional mortgage was 6.41%. is is conserva-tive because it assumes that all of these underwater homeowners were prime borrowers with conventional mortgages.Many of these underwater homeowners were subprime borrowers that had substantially higher interest rates. Fur-thermore, in the ten years from 1997 through 2006, the average interest rate on a conventional mortgage was 6.75%,higher than the 6.41% figure we used.

Using a mortgage calculation formula in Microsoft Excel, we calculated that the monthly mortgage payment on $2.0trillion for a 30-year, fixed-rate loan at 6.41% interest would be $12.4 billion. is is the pre-modification monthlymortgage payment.

e next step was calculating what the payments would be if principals were written down to market value and resetto current interest rates. To ascertain the principal for market value mortgages, we once again turned to CoreLogicsNegative Equity Report. According to the report, in the first quarter of 2011, there were 10.9 million underwatermortgages nationally, and the average underwater mortgage had $65,000 in negative equity. at means that in total,underwater homeowners owed $709 billion more on their homes than they were worth. e principal on marketvalue mortgages, therefore, should be $1.3 trillion. To get the current market interest rate, we again used figures fromthe Federal Reserve Boards H.15 Release. According to the release, the going interest rate on a 30-year, fixed-rate,conventional mortgage as of July 2011 was 4.55%.

According to the mortgage calculation formula, the monthly mortgage payment on $1.3 trillion for a 30-year, fixedrate loan at 4.55% interest is $6.5 billion. is is the post-modification monthly mortgage payment. at means thatafter modification, total mortgage payments on underwater mortgages would drop $5.9 billion per month, or $71billion annually. at means that over the 30-year life of the mortgage, homeowners would save $2.1 trillion.

To calculate the jobs impact of this figure, we relied on a study by Robert Pollin and Heidi Garret-Peltier that showedthat giving Americans a $1 billion tax break for personal consumption would create 14,800 jobs, which translates to$67,658 per job.17 Reducing homeowners monthly mortgage payments would have a similar impact to a tax cut forpersonal consumption by freeing up dollars for households to use on other things like buying groceries and school sup-plies. We therefore divided the $71 billion in annual savings by $67,658 per job to determine that loan modificationswith principal and interest rate write-downs to market value would create 1.05 million jobs.

For the state-by-state analysis, we applied our same methodology to the state-level data found in CoreLogics Nega-tive Equity Report. Unless more precise data was available, the average negative equity per underwater home by statewas rounded to the nearest $10,000. CoreLogic did not list data for Louisiana, Maine, Mississippi, South Dakota,Vermont, West Virginia, or Wyoming, so we also left those states out of our state-by-state analysis. Due to roundingerrors and the fact that we did not have state-level data for a handful of states, the state totals in Appendix A do notadd up to the national total.


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EndnotesMeet the Press transcript, August 7, 2011. http://www.msnbc.msn.com/id/44050464/ns/meet_the_press-transcripts/t/meet-press-transcript-august/#.TkExkL_vEY4Real Economy Project of the Center for Media and Democracy. Updated July 2011 http://www.sourcewatch.org/index.php?title=Total_Wall_Street_Bailout_CostFederal Reserve of St. Louis, Economic Research 03 Aug 2011. http://research.stlouisfed.org/fred2/series/WRESBAL

Total compensation expense for BAC, JPM, WFC, GS, and MS from income statements in banks 4Q10 earnings releases.Krugman, Paul. Letting Bankers Walk. New York Times. 17 Jul 2011. http://www.nytimes.com/2011/07/18/opinion/18krugman.html?_r=1New CoreLogic Data Shows Slight Decrease in Negative Equity. CoreLogic press release. 07 Jun 2011.Federal Reserve Bank of St. Louis. Real Retail and Food Service Sales. Seasonally Adjusted, Deflated Using the Con-sumer Price Index for All Urban Consumers (1982-84=100). http://research.stlouisfed.org/fred2/series/RRSFS/downloaddata?cid=6Bureau of Labor Statistics. Seasonally Adjusted, Total Nonfarm, Employment data. Jan 2008-Jun 2011. http://www.bls.gov/ces/Sidel, Robin. Troubles for Prime Borrowers Intensify. Wall Street Journal. 04 Sep 2009. http://online.wsj.com/article/SB125202003216284895.htmlMartin, Andrew. For the Jobless, Little U.S. Help on Foreclosure. New York Times. 04 Jun 2011. http://www.nytimes.com/2011/06/05/business/economy/05housing.html

Based on calculation that giving Americans $1 billion for personal consumption would add 14,800 jobs into the economy,which means that it takes $67,658 to create one job: Pollin, Robert and Heidi Garrett-Peltier. e U.S. Employment Ef-fects of Military and Domestic Spending Priorities: An Updated Analysis. Political Economy Research Institute, University ofMassachusetts, Amherst. p. 5. Oct 2009. http://www.peri.umass.edu/fileadmin/pdf/published_study/spending_priori-ties_PERI.pdfLi, Wei and Sonia Garrison. Fix or Evict? Loan Modification Return More Valuean Foreclosures. Center for ResponsibleLending. p. 1-2. 22 Mar 2011. http://www.responsiblelending.org/mortgage-lending/research-analysis/fix-or-evict.pdfompson, Diane E. Why Servisers Foreclose When ey Should Modify and Other Puzzles of Servicer Behavior. NationalConsumer Law Center. p. 2. Oct 2009. http://www.macdc.org/research/Servicer-Report1009.pdfIbid, p. 17Ibid, p. vGrim, Ryan, Arthur Delaney, and Lucia Graves. Learning to Walk: Fear, Shame And Your Underwater Mortgage. Huffing-ton Post. 03 Feb 2011. http://www.huffingtonpost.com/2011/02/03/learning-to-walk-underwater-mortgages_n_818315.

htmlPollin, Robert and Heidi Garrett-Peltier. e U.S. Employment Effects of Military and Domestic Spending Priorities: An Up-dated Analysis. Political Economy Research Institute, University of Massachusetts, Amherst. p. 5. Oct 2009. http://www.peri.umass.edu/fileadmin/pdf/published_study/spending_priorities_PERI.pdf

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